IRA Valuation Mistakes

Proper valuation of IRA assets affects many transactions and taxable events such as:

  • RMD calculations
  • In-kind distributions
  • Roth conversions
  • Estate valuation
  • Inherited IRA distributions
  • Bankruptcy protection
  • Creditor protection

Alternative assets such as hedge funds, non-traded REITS & BDCs, equipment leasing programs, limited partnerships, private investment funds, and other illiquid assets are inherently difficult to value since they do not trade on established exchanges. The required valuation to be used in all of the above reporting scenarios is fair market value (FMV). FMV for tax reporting purposes is defined in the “willing buyer – willing seller” rule which reads:

“The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Most IRA trustees/custodians report alternative assets at either the original purchase cost or the current value as reported by the asset sponsor. Sponsor provided values are generally net asset value (NAV) or some variation thereof. In either case, the value reported is typically not consistent with the FMV definition shown above and required for tax reporting.

The result of these IRA valuation errors can be severe. IRA owners who sustain a taxable event where the alternative assets are valued higher than FMV incur more tax than necessary. IRA owners who report a taxable event where the alternative assets are valued lower than FMV will owe additional tax plus penalties and interest. RMDs calculated based on inflated alternative asset values result in more money be forced out of the IRA annually and cause the IRA owner to report excess taxable income each year. RMDs based on less than FMV of IRA assets results in too little being withdrawn from the account which can result in hefty penalties on the amount not withdrawn.

Jagen™ can assist you in correcting these issues. Depending on specific facts and circumstances, case outcomes may include refunds of excess tax paid, reduction in penalties and interest, reduction in tax owed and more. Contact our office today to review your specific scenario.

Advanced Tax & Financial Planning Strategies using Alternative Investments

Jagen™ provides individual case consulting to other professional advisors and their clients on cases involving alternative investments. We can assist with tax mitigation strategies involving these types of assets in all areas including income, estate and gift tax. Attorneys, CPAs and financial advisors can bring us in on cases where the client already owns alternative assets of any kind as well as cases where an alternative asset may help to achieve specific planning objectives.

Alternative Asset Transactions with Retirement Accounts

Clients often desire to invest IRA and other retirement plan monies into alternative assets including real estate, limited partnerships, private LLCs, start-up capital transactions and other unique investments. Sometimes these transactions include the use of leverage to complete. We are able to steer professional advisors and their clients through the issues of prohibited transactions, unrelated business income tax (UBIT), unrelated debt financed income (UDFI) and others when contemplating such transactions. Jagen™ can also consult on cases where existing alternative assets held by a retirement account may be causing problems.

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